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Sunday, February 18, 2018

corporate laws - Electricity laws - whether the respondent can generate power with RLNG ? - No = The Andhra Pradesh Electricity Regulatory Commission (hereinafter referred to as “the Commission”), in O.P. No. 20 of 2013 dated 08.08.2013, preferred by the respondent, held that the term ‘fuel’ as used in the PPA meant natural gas only in its natural form, and did not include RLNG. Simply because the physical composition of natural gas and RLNG are similar, it does not automatically entitle the respondent to generate power with RLNG, which was more expensive and not domestically available, affecting the per unit supply of power generated by it, as ultimately the consumer would have to pay more.= inevitable conclusion that the intention of the parties under the agreement, as amended from time to time, was to generate power from fuel reasonably priced, so as to ultimately make available power to the consumers at reasonable rates. The choice of fuel as natural gas only has, therefore, to be understood as being confined to natural gas only in its natural form. The respondent was well aware that RLNG was never intended to be included in the definition of natural gas as understood by the parties, notwithstanding that it may be a variant of natural gas.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 8747 of 2014
TRANSMISSION CORPORATION OF
ANDHRA PRADESH LTD. AND OTHERS   .......APPELLANT(S)
VERSUS
M/s. GMR VEMAGIRI POWER
GENERATION LTD. AND ANOTHER        ......RESPONDENT(S)
JUDGMENT
NAVIN SINHA, J.
The controversy for determination in the present appeal
is, whether the word ‘fuel’ as used in clause 1.1.27 of the
Power Purchase Agreement (hereinafter referred to as ‘PPA’)
means   “natural   gas   only”   or   includes   Regasified   Liquefied
Natural Gas (hereinafter referred to as ‘RLNG’) also.
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2. The Andhra Pradesh Electricity Regulatory Commission
(hereinafter referred to as “the Commission”), in O.P. No. 20 of
2013 dated 08.08.2013, preferred by the respondent, held that
the term ‘fuel’ as used in the PPA meant natural gas only in its
natural form, and did not include RLNG.  Simply because the
physical composition of natural gas and RLNG are similar, it
does   not   automatically   entitle   the   respondent   to   generate
power   with   RLNG,   which   was   more   expensive   and   not
domestically available, affecting the per unit supply of power
generated by it, as ultimately the consumer would have to pay
more.
3.  In Appeal No. 222 of 2013 preferred by the respondent,
the   Appellate   Tribunal   by   the   impugned   order   dated
30.06.2014 held that use of the word “only” after “natural gas”
in the PPA dated 02.05.2007 had to be understood in context
of the deletion of other alternate fuel such as Naphtha etc.
incorporated in the earlier PPAs, and it was never intended to
restrict the meaning of the word natural gas to exclude RLNG,
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which was a variant of natural gas and did not come in the
category of an alternate fuel.  It further held that the higher
price of RLNG could not be a determinative factor to exclude it
from the agreement as any increase in price of gas was an
accepted   risk,   especially   in   view   of   the   non­availability   of
natural gas from the KG­D6 basin.  The use of RLNG had also
been permitted on earlier occasions without any amendment
to the PPA.
4. The predecessor of the appellant, the Andhra Pradesh
State   Electricity   Board,   in   May,   1995   invited   bids   for
establishing     short   gestation   gas/Naphtha/fuel   oil   based
power stations to bridge the demand supply gap of power in
the State of Andhra Pradesh.   Pursuant to the same, a PPA
was executed between the parties on 31.03.1997 under which
Naphtha   was   the   primary   fuel   and   gas   an   alternate   fuel.
Considering the high price of Naphtha, in March 2000, the
Government   of   Andhra   Pradesh   decided   to   make   gas   the
primary   fuel.     The   Ministry   of   Petroleum   on   05.06.2000
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allotted 1.64 MMSCMD of natural gas to the respondent from
the KG­D6 Basin sourced through the Gas Authority of India
Ltd   (GAIL),   leading   to   a   gas   supply   agreement   dated
31.08.2001 between the respondent and the latter.  The PPA
was   accordingly   amended   on   18.06.2003   making   gas   the
primary   fuel   and   Naphtha   an   alternate   fuel.     The   PPA
underwent further amendment on 02.05.2007, restricting the
term ‘fuel’ to “natural gas only”.  A comparative status of the
three PPA’s can beneficially be set out as follows:
PPA dated
31.03.1997
Amendment
Agreement to the
PPA dated
18.06.2003
Amendment
Agreement
dated
02.05.2007
“1.1.27)   “Fuel:
means  gas,   Naptha,
low   sulphur   heavy
stock or furnace oil,
and the like, that is
intended to be used
as   primary   fuel,  by
one or more units of
the   Project   to
generate   power   from
the Project or in case
of   unavailability   of
Naptha   any   of   the
above   as   alternate
1.1.27)   “Fuel:
means Natural Gas
that   is   intended
to   be   used   as
primary   fuel  by
one   or   more   units
of   the   project   to
generate or in case
of   unavailability   of
primary   fuel,
Naptha   or   Low
Sulphur   heavy
stock   and   the   like
as alternate fuel.”
1.1.27)   “Fuel:
means
Natural   Gas
only.”
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fuel.”
5. GAIL   having   been   unable   to   supply   gas   under   the
agreement   due   to   prioritisation   of   other   sectors,   the
respondent was permitted to purchase natural gas from M/s.
Reliance Industries Ltd (RIL) at GAIL prices.  The respondent,
on 07.08.2012 and 27.08.2012, sought permission to allow
use of   RLNG  as  fuel  for  generating  power.     The  appellant
rejected the request on 10.09.2012 stating that under the PPA
dated 02.05.2007, fuel meant “natural gas only” and did not
include RLNG, which was priced much higher affecting the per
unit price of power generated from the same to the ultimate
detriment of the consumers.
6. Shri   Basava   Prabhu   Patil,   learned   senior   counsel
appearing for the appellant, submitted that under the PPA, it
was only natural gas in its natural form which was agreed to
be used as fuel for generation of power.  Merely because RLNG
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may be a variant of natural gas, will not suffice to bring it
within the definition of fuel under the PPA.  The cost of RLNG
being   three   to   four   times   higher   than   natural   gas,   the
Commission rightly held that it was also a relevant factor to
hold   that   RLNG   was   never   intended   by   the   parties   to   be
included in the agreement.
7.  The word ‘fuel’, as defined in the agreement, had to be
given its natural meaning by confining it to natural gas only as
intended by the parties.  The definition could not be extended
so as to include RLNG, as the parties never intended the same.
There is no ambiguity in language warranting any inclusion to
the definition either by implication or intention.  Even if there
was   any   ambiguity   with   regard   to   the   intendment   of   the
parties, the true intent has to be gathered from the plain
meaning   of   the   words   used,   read   conjunctively   with   all
surrounding   circumstances   and   documents.     Applying   the
common   parlance   test,   RLNG   was   not   synonymous   with
natural   gas   in   the   business   and   neither   interchangeable,
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because of the additional processes required in the latter and
the resultant higher cost involved including importation, as
distinct   from   natural   gas   available   at   a   lesser   price   and
domestically.
8. Under   the   PPA   dated   31.03.1997,   Naphtha   was   the
primary fuel and gas was an alternate fuel.  Clause 3.3 dealing
with energy charge defined cost of fuel based on indigenous
and importation cost.  The PPA contemplated approval of the
fuel supply agreement by the fuel supply committee, to ensure
reasonable   prices   as   the   cost   of   power   generation   was   of
paramount consideration in the interest of the consumer.  The
cost of Naphtha being higher, the PPA came to be amended on
18.06.2003 making natural gas the primary fuel, and Naphtha
an alternate fuel.  If RLNG was in contemplation of the parties,
and was considered to fall within the term natural gas, there
would   have   been   some   discussion   regarding   it   in   the
deliberations   of   the   Commission   while   approving   the
amendments   to   the   PPA,   especially   in   view   of   the   price
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difference. Such absence makes it manifest that the parties
never intended to include RLNG in the term natural gas.  The
significance of the words “only” after “natural gas” in the third
PPA   dated   02.05.2007   cannot   be   lost   sight   of.   It   was
necessitated in context of the realization that the parties may
have resorted to other costly alternate fuels consequent to the
dismantling of the administered price mechanism and the fuel
supply committee.
9. The fact that RLNG may have been permitted to be used
for   a   short   period   of   seven   days   from   16.04.2009   to
23.04.2009 under pressing circumstances of a power crisis, by
special orders under Section 11 of the Electricity Act, 2003 or
again for  a short  duration  from  15.02.2011 to  31.05.2011
cannot be stretched to contend that RLNG was intended to be
included   within   the   term   natural   gas.     The   cost   of   power
generated from natural gas was Rs.1.75 per KWH while that
from RLNG works out to Rs.4.63 per KWH and the financial
burden for this short duration is Rs.427 crores.  In March and
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April use of RLNG was permitted at per unit generation cost of
Rs.9/­ compared to Rs.3/­ per unit with existing natural gas
leading to a financial burden of Rs.3.7 crores per day.  These
exceptions   can   never   be   construed   to   mean   the   norm   to
contend that use of RLNG was always in the contemplation of
the parties and was intended to be included within the term
natural   gas.   The   very   fact   that   the   respondent   sought
permission on 07.08.2012 and 27.08.2012 to use RLNG for
power   generation   makes   it   manifest   that   even   as   per   its
understanding,   RLNG   was   not   included   within   the   term
natural   gas   according   to   the   intent   of   the   parties.     The
appellant in its reply dated 10.09.2012 had reiterated that
RLNG did not fall within the ambit of the PPA which was
confined to natural gas only citing the cost difference of power
per unit also.
10. A contract document had to be interpreted in accordance
with the language used, with reference to the context in which
it came to be prepared.  A technical view of an agreement, torn
9
out of context, cannot be taken to reinterpret the agreement
and arrive at a new finding with regard to the intendment of
the parties by including something which was never intended
to be included, to the prejudice of a party to the contract,
while   giving   an   undue   advantage   to   the   other.   A   primary
consideration will also be the understanding of the parties of
the terms of the contract and what was intended, as reflected
inter alia from their conduct.  The contract being a commercial
document, utmost importance had to be given to its efficacy.
Shri Patil, in support of the submissions placed reliance on
Polymat India (P) Ltd. & Anr. vs. National Insurance Co.
Ltd.   &   Ors.,  2005   (9)   SCC   174,  Gedela   Satchidananda
Murthy   vs.  Dy.  Commissioner,  Endowments  Department,
A.P. & Ors.,  2007 (5) SCC 677, Timblo Irmaos Ltd., Margo
vs. Jorge Anibal Matos Sequeira & Anr., 1977 (3) SCC 474,
Sappani   Mohamed   Mohideen   and   Anr.   vs.   R.V.
Sethusubramania   Pillai   and   Ors.,  1974   (1)   SCC   615,
Trutuf Safety Glass Industries vs. Commissioner of Sales
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Tax,  U.P.,  (2007) 7 SCC 242,  The  Union of  India  vs.  M/s.
D.N.   Revri   and   Co.   and   Ors.,  1976 (4) SCC 147,  Nabha
Power   Ltd.   vs.   Punjab   State   Power   Corporation   Ltd.  &
Anr.,  2017   SCC   Online   1239   and  Bharat   Aluminum
Company   vs.   Kaiser   Aluminum   Technical   Services   Inc.,
2016 (4) SCC 126.
11. Shri Vikas Singh, learned senior counsel appearing for
the Respondent, submitted that the original bid documents
permitted import of fuel also, and fuel tie up linkage was the
responsibility   of   the   bidder.   The   Respondent   invested
approximately   Rs.1153.10   crores   in   setting   up   the   power
generation plant, of which, 68.29% of the funding was from
banks   and   financial   institutions.     The   plant   has   operated
intermittently for approximately 64 months only in the last 11
years.     The   conduct   of   the   appellant   in   not   accepting
availability declaration with regard to RLNG was unjustified.
The appellant was well aware of the possibility of future hike
in gas prices, and more particularly after dismantling of the
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administrated price mechanism inclusive of inflation, all of
which would make the gas prices market driven.   Therefore,
merely because the cost of RLNG was higher could not be a
ground to contend that it was never intended to be included
within the definition of natural gas or was contrary to interest
of   the   consumer.   RLNG   was   but   a   form   of   natural   gas,
compressed for transformation from gaseous to liquid state,
reducing the volume to facilitate transportation in a safe and
stable   manner.   Once   delivered   at   the   destination,   it   is
regasified and then supplied to the consumer.  Even according
to the dictionary meaning they are the same.
12. The deletion of the words “intended to be used” after the
words   “natural   gas”,   as   used   in   the   second   PPA,   and   the
replacement thereof in the third PPA by the words “natural gas
only” gave a much wider meaning and amplitude to the word
natural gas so as to take within its ambit RLNG also.   The
deletion of “importation charges” in the PPA dated 18.06.2003
was of no significance as RLNG was to be delivered at the
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project site through the pipeline, and the cost of fuel was to be
at   the   metering   point   at   the   project   site,   which   would   be
inclusive   of   importation   cost.   Evidently   there   would   be   no
separate charges by GAIL towards importation of RLNG. So
long   as   the   supplies   were   at   GAIL   prices,   the   appellants
cannot raise objections with regard to price.
13. The term natural gas has not been defined under the
PPA. The definition of natural gas in Section 2(za)(i) of the
Petroleum   and   Natural   Gas   Regulatory   Board   Act,   2006
(hereafter   referred   to   as   the   “PNGRB   Act”)   includes   both
liquefied natural gas (LNG) and RLNG. The appellants on more
than one occasion had themselves permitted use of RLNG for
production   of   power   in   2011,   2012   and   2013.     It   is
demonstrative of the fact that RLNG was never intended to be
excluded under the PPA.   It was only when the respondent
wrote to the appellant for operationalising the RLNG scheme,
that the appellant replied on 27.03.2015 raising objection to
RLNG being outside the terms of the PPA.  The respondent had
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never sought permission from the appellant for use of RLNG
by its letters dated 07.08.2012 and 27.08.2012, but merely
given intimation about what was otherwise permissible under
the   PPA.   After   the   dismantling   of   the   administered   price
mechanism   and   the   fuel   Supply   Committee,   there   was   no
requirement for consent or approval of the appellant.
14. The appellant having itself permitted use of RLNG on
more   than   one   occasion,   cannot   contend   its   exclusion
especially   when   the   agreement   clearly   is   suggestive   of   its
inclusion.   Alternately, there had been waiver on part of the
appellant   by   having   permitted   its   use   on   more   than   one
occasion.  The appellant cannot be permitted to approbate and
reprobate.   Natural gas had been defined in  Association  of
Natural Gas & Ors. vs. Union of India & Ors., 2004 (4) SCC
489. The plea that power generated by RLNG would be more
costly and not in the interest of the consumer is belied by the
fact that today the appellant is purchasing power at higher
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rate. The Director General, Petroleum Planning and Analysis
Cell   had   now   fixed   price   for   marketing   including   pricing
freedom for gas to be produced from discoveries in deepwater,
ultra­deepwater and high pressure­high temperature areas for
the period 01.04.2016 to 31.09.2016 at US$ 6.61/MMBTU on
GCV   basis.     On   05.05.2016,   the   respondent   wrote   to   the
appellant informing that GAIL had communicated that ONGC
has indicated availability of the gas in the KG basin from its
deepwater fiels­S1 and VA fields at the rate of 6.3$/MMBTU
even which has not been acceded to, as being beyond the PPA.
15.  We have considered the submissions on behalf of the
parties, and are not in agreement with the conclusions of the
Appellate Tribunal.
16. The original PPA dated 31.03.1997, provided for Naphtha
to be used as the primary fuel for generation of power and gas
was an alternate fuel. Importation was also permissible.  The
15
price was to be fixed by the fuel supply committee, both to
keep it reasonable, and to ensure that the cheaper option was
always   used.   In   March   2000,   the   Government   of   Andhra
Pradesh, due to the cost factor, decided to replace gas as the
primary fuel, and Naphtha was made an alternate fuel leading
to allotment of natural gas by the Ministry of Petroleum and
execution of an agreement between the respondent and GAIL.
The PPA was then amended on 18.06.2003 making gas the
primary fuel.  Subsequently, when GAIL was unable to supply
the   allocated   quantities   of   natural   gas   to   the   respondent
because of sector prioritisation, the respondent was permitted
to obtain supplies of natural gas from RIL.   The realisation
that in the circumstances, the generator could resort to use of
other costly fuels also, led to the third amended PPA dated
02.05.2007 confining the definition of ‘fuel’ to “natural gas
only”.
17. It   is   relevant   to   notice   that   at   both   stages   of   the
amendment   to   the   PPA,   in   the   proceedings   before   the
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Commission   under   Section   21(5)   of   the   Andhra   Pradesh
Electricity Reforms Act, 1998, the parties never referred to the
availability   of   RLNG   as   fuel   contemplated   within   the   term
“natural gas” and the discussion was confined to “natural gas
only”.  Had the parties intended otherwise, or the respondent
had any such inkling in mind of RLNG being a variant of
natural gas and consequently intended to be included in it,
coupled with its availability as compared to natural gas, surely
it would have figured in the discussion before the Commission.
The absence of the same, combined with RLNG having to be
imported, deletion of the importation clause in the PPA of
18.06.2003, the higher price of RLNG, leads to the inevitable
conclusion   that   it   was   never   in   the   contemplation   of   the
parties that RLNG was to be included in the term “natural gas”
even though it may be a variant of the same.   It stands to
reason that if Naphtha was removed as primary fuel because
of the cost factor and made an alternate fuel in the second
amendment to the PPA, the question of RLNG being included
17
within the term of “natural gas only” irrespective of the cost
factor, will not stand the test of reason.
18. A wrong question will inevitably lead to a wrong answer.
The question for consideration presently is not if RLNG is a
form   of   natural   gas,   but   whether   the   parties   intended   to
exclude   any   form   of   gaseous   fuel   from   the   ambit   of   the
contract except for natural gas in its natural form from the
domestic market, keeping the  price of  gas in mind, which
would ultimately set the price per unit of electricity for the
consumer. The PPA is a technical commercial document.   It
has been drafted by persons conversant with the business.
RLNG   and   natural   gas   as   used   in   the   agreement   are   not
synonymous   or   interchangeable.   The   principle   of   business
efficacy will also have to be kept in mind for interpreting the
contract.  The terms of the agreement have to be read first to
understand the true scope and meaning of the same with
regard to the nature of the agreement that the parties had in
mind.  It will not be safe to exclude any word in the same.  In
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Khardah Company Ltd. vs. Raymon & Co. (India) Private,
Ltd., 1963 (3) SCR 183, on interpretation of a contract it was
observed as follows:
“18.  …  We  agree that  when a  contract  has
been reduced to writing we must look only to
that writing for ascertaining the terms of the
agreement between the parties but it does not
follow from this that it is only what is set out
expressly   and   in   so   many   words   in   the
document that can constitute a term of the
contract between the parties. If on a reading of
the   document   as   a   whole,   it   can   fairly   be
deduced from the words actually used therein
that   the  parties  had  agreed  on   a  particular
term, there is nothing in law which prevents
them from setting up that term. The terms of a
contract   can   be   expressed   or   implied   from
what has been expressed. It is in the ultimate
analysis   a   question   of   construction   of   the
contract. And again it is well established that
in construing a contract it would be legitimate
to   take   into   account   surrounding
circumstances…”
19.     It will not be a safe method to interpret a contract by
picking   out   one   clause   of   the   same  defining   fuel,   apply   a
technical   scientific   meaning   to   it   as   observed   in  Truetuf
Safety Glass Industries (supra) and then conclude that being
19
a form of natural gas, RLNG was intended to be impliedly
included in the definition of fuel.  The terms of a contract have
to be given their plain meaning with regard to the intendment
of the parties as to what was intended to be included and what
was not intended to be included, as distinct from an express
exclusion. The commercial parlance test will also have to be
applied as to whether those in the business consider the two
forms   of   gas   as   synonymous   and   interchangeable.   Quite
obviously the answer has to be in the negative considering the
importation of RLNG, additional processes involved and the
consequent higher costs involved.
20.  In the event of any ambiguity arising, the terms of the
contract   will   have   to   be   interpreted   by   taking   into
consideration   all   surrounding   facts   and   circumstances,
including   correspondence   exchanged,   to   arrive   at   the   real
intendment of the parties, and not what one of the parties may
contend subsequently to have been the intendment or to say
20
as included afterwards, as observed in Bank of India & Anr.
vs. K. Mohandas & Ors., (2009) 5 SCC 313:
“28. The true construction of a contract must
depend upon the import of the words used and
not   upon   what   the   parties   choose   to   say
afterwards. Nor does subsequent conduct  of
the parties in the performance of the contract
affect   the   true   effect   of   the   clear   and
unambiguous words used in the contract. The
intention of the parties must be ascertained
from the language they have used, considered
in the light of the surrounding circumstances
and the object of the contract. The nature and
purpose of the contract is an important guide
in ascertaining the intention of the parties.”
21.  The   respondent’s   letters   dated   07.08.2012   and
27.08.2012 become crucially relevant for the understanding
that it was itself under no misapprehension that RLNG was
never intended to be included within the definition of natural
gas under the contract. In the former, the respondent wrote,
“We await the confirmation from your good office to take it up
further for obtaining necessary consent, if any, in accordance
with law for use of RLNG and the resultant tariff increase.”
The   latter  again   requested   for  permission   to   use   RLNG   to
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supplement shortfall in gas from the KG­D6 Basin, requesting
to acknowledge its usage. The contention of the respondent
that   these   were   only   intimations   and   not   request   for
permission to use RLNG stands belied from the plain language
used in them.   The appellant in its reply dated 10.09.2012
explicitly stated that under the agreement no other fuel except
natural   gas   could   be   used   and   that   RLNG   was   never
contemplated in the definition of fuel declining to accept the
spot supply agreement for RLNG supplies, citing the cost of
power per unit from the same at Rs.9­10 in comparison to
Rs.3/­ per unit from natural gas.   It is only thereafter the
respondent approached the Commission in OP No.20 of 2013.
The pleadings of the respondent, as quoted hereinafter, further
confirm its own understanding that RLNG was never intended
to be included in the definition of fuel which was confined to
natural gas only :­
“9.   Since   the   above   scenario   affects   the
generation   activities   of   the   Petitioner,   the
Petitioner   proposed   to   use   RLNG.     In   this
respect,   the   Petitioner   has   already   made
representations to the Respondent Nos. 2 and 3
22
vide its letters dated 7.8.2012 and 27.8.2012
(produced   as   Annexures   P­2   and   P­3
respectively).     In   both   these   letters,   the
Petitioner appealed to the said Respondents to
allow   usage   of   RLNG   and   substantiated   the
circumstances/reasons for the said request of
the petitioner.
10. To   the   utter   surprise   and   shock   of   the
Petitioner,   instead   of   acceding   to   the   above
requests of the Petitioner, the Respondent No.3
has   rejected   the   above   requested   of   the
Petitioner vide its letter dated 10.09.2012.”
22. The sporadic use of RLNG on one or two occasions under
pressing circumstances, after due orders under Section 11 of
the Electricity Act, 2003, for short durations, cannot make the
exception the norm to contend either that RLNG was included
in the term fuel or that the appellant had agreed to its use.
The question of waiver by the appellant or application of the
principle of approbate and reprobate does not arise in the facts
of the case.
23. The   present   was   a   contract   for   purchase   of   power
generated from fuel which was reasonably priced so as to keep
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in check the cost of power generated from the same, in the
interest of the consumer.   Undoubtedly, cost of fuel was a
primary   consideration   in   the   mind   of   the   appellant.     The
contextual background in which the PPA originally came to be
made, the subsequent amendments, the understanding of the
respondent   of   the   agreement   as   reflected   from   its   own
communications   and   pleadings   make   it   extremely   relevant
that   a   contextual   interpretation   be   given   to   the   question
whether RLNG was ever intended to be included within the
term “Natural Gas”, as observed in  Bihar  State  Electricity
Board vs. Green Rubber Industries, (1990) 1 SCC 731:
“23…. Every contract is to be considered with
reference   to   its   object   and   the   whole   of   its
terms and accordingly the whole context must
be considered in endeavouring to collect the
intention   of   the   parties,   even   though   the
immediate object of enquiry is the meaning of
an isolated clause….”
24. In the facts and circumstances of the present case, there
can be no manner of doubt that the parties by their conduct
and dealings right up to the institution of proceedings by the
respondent   before   the   Commission   were   clear   in   their
24
understanding that RLNG was not to be included within the
term   “Natural   Gas”   under   the   PPA.   The   observations   in
Gedela   Satchidananda   Murthy  (supra)  are   considered
apposite in the facts of the present case :­
“32…The principle on which Miss Rich relies is
that   formulated   by   Lord   Denning,   M.R.   in
Amalgamated Investment & Property Co. Ltd.
v.   Texas­Commerce   International   Bank   Ltd.,
[1982] 1 QB at p.121:
‘If parties to a contract, by their course
of dealing, put a particular interpretation on
the terms of it—on the faith of which each of
them—to the knowledge of the other—acts
and conducts their mutual affairs—they are
bound by that interpretation just as much
as if they had written it down as being a
variation of the contract. There is no need to
inquire   whether   their   particular
interpretation is correct or not—or whether
they were mistaken or not—or whether they
had   in   mind   the   original   terms   or   not.
Suffice it that they have, by their course of
dealing,   put   their   own   interpretation   on
their contract, and cannot be allowed to go
back on it.’
(emphasis supplied)"
25. A   commercial   document   cannot   be   interpreted   in   a
manner   to   arrive   at   a   complete   variance   with   what   may
25
originally have been the intendment of the parties. Such a
situation can only be contemplated when the implied term can
be considered necessary to lend efficacy to the terms of the
contract. If the contract is capable of interpretation on its
plain meaning with regard to the true intention of the parties
it   will   not   be   prudent   to   read   implied   terms   on   the
understanding   of   a   party,   or   by   the   court,   with   regard   to
business efficacy as observed in Satya Jain (D) thr. Lrs. &
Ors. vs. Anis Ahmed Rushdie (D) thr. Lrs. & Ors., (2013) 8
SCC 131, as follows:­
“33. The   principle   of   business   efficacy   is
normally   invoked   to   read   a   term   in   an
agreement   or   contract   so   as   to   achieve   the
result   or   the   consequence   intended   by   the
parties   acting   as   prudent   businessmen.
Business efficacy means the power to produce
intended results. The classic test of business
efficacy   was   proposed   by   Lord   Justice
Bowen,L.J.   in   Moorcock.   This   test   requires
that   a   term   can   only   be   implied   if   it   is
necessary   to   give   business   efficacy   to   the
contract   to   avoid   such   a   failure   of
consideration   that   the   parties   cannot   as
reasonable   businessmen   have   intended.   But
only   the   most   limited   term   should   then   be
implied–the   bare   minimum   to   achieve   this
goal.   If   the   contract   makes   business   sense
26
without the term, the courts will not imply the
same. The following passage from the opinion
of Bowen, L.J. in the Moorcock (supra) sums
up the position: (PD p.68)
“…In business transactions such
as this, what the law desires to effect by
the implication is to give such business
efficacy to the transaction as must have
been   intended   at   all   events   by   both
parties who are business men; not to
impose on one side all the perils of the
transaction, or to emancipate one side
from all the chances of failure, but to
make   each   party   promise   in   law   as
much, at all events, as it must have
been   in   the   contemplation   of   both
parties that he should be responsible
for   in   respect   of   those   perils   or
chances.”
34. Though in an entirely different context,
this court in United India Insurance Co. Ltd. v.
Manubhai Dharamasinhbhai Gajera and Ors.
had   considered   the   circumstances   when
reading an unexpressed term in an agreement
would be justified on the basis that such a
term was always and obviously intended by
and   between   the   parties   thereto.   Certain
observations   in   this   regard   expressed   by
Courts   in   some   foreign   jurisdictions   were
noticed by this court in Para 51 of the report.
As   the   same   may   have   application   to   the
present case it would be useful to notice the
said observations :(SCC p.434)
“51. …’…”Prima facie that which in any
contract is left to be implied and need
not   be   expressed   is   something   so
obvious that it goes without saying; so
27
that, if, while the parties were making
their   bargain,   an   officious   bystander,
were to suggest some express provision
for   it   in   their   agreement,   they   would
testily   suppress   him   with   a   common
‘Oh, of course!’ ‘’ Shirlaw v. Southern
Foundries (1926) Ltd., KB p.227.’
* * *
“An expressed term can be implied if and
only   if   the   court   finds   that   the   parties
must have intended that term to form part
of their contract: it is not enough for the
court to find that such a term would have
been   adopted   by   the   parties   as
reasonable men if it had been suggested
to them: it must have been a term that
went without saying, a term necessary to
give business efficacy to the contract, a
term which, although tacit, formed part of
the contract which the parties made for
themselves.   Trollope   and   Colls   Ltd.   v.
North   West   Metropolitan   Regl.   Hospital
Board, All ER p.268a­b.’ ”
35.   The   business   efficacy   test,   therefore,
should be applied only in cases where the
term that is sought to be read as implied is
such   which   could   have   been   clearly
intended   by   the   parties   at   the   time   of
making of the agreement...”
26.  The definition of natural gas in Section 2(za)(i) of the
PNGRB Act, has no relevance to the present controversy as the
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Act   was   enacted   with   the   object   to   oversee   and   regulate
refining, processing, distribution and marketing of petroleum
products and natural gas.  Similarly, the observation made in
Association   of   Natural   Gas  (supra)   in   context   of   the
controversy with regard to legislative entry has no relevance to
the interpretation of the PPA.
27. The   aforesaid   discussion,   therefore,   leads   to   the
inevitable conclusion that the intention of the parties under
the agreement, as amended from time to time, was to generate
power from fuel reasonably priced, so as to ultimately make
available power to the consumers at reasonable rates. The
choice   of   fuel   as   natural   gas   only   has,   therefore,   to   be
understood as being confined to natural gas only in its natural
form. The respondent was well aware that RLNG was never
intended to be included in the definition of natural gas as
understood by the parties, notwithstanding that it may be a
variant of natural gas.
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28. The appeal, therefore, has to be allowed, the Appellate
Tribunal   judgment   is   reversed,   and   the   Commission   order
dated 08.08.2013 is affirmed.
……………………………….J.
 (Rohinton Fali Nariman)     
…….………………………..J.
   (Navin Sinha)
New Delhi,
February 16, 2018
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